How much should I pay for land? As always, it depends. In the past I’ve mentioned the rising demand for high-quality arable land, a finite resource in an age of infinite growth and consumption that will undoubtedly have an effect on farmland prices. According to farmland.org, it is estimated that 1/32 of the worlds land mass is arable. Moreover, much of this area lies in politically or geographically isolated areas. In Panama, Nicaragua and Guatemala, where I have worked the last few years we have seen tremendous increase in farmland prices. A recent report estimates farmland in Brazil has quadrupled over the last decade. On the one hand, at least from a real-estate perspective, the upside could trump concerns about rising purchase and establishment costs, on the other we will face rising costs both as consumers and investors, meaning of course plantation costs, at all levels, will continue to rise. In Panama we still find properties in the $2000 – $3000 per hectare range, however these are consistently in areas of isolated or difficult access or poor quality broken land. Viable reforestation farmlands are fetching upwards of $4000, assuming medium to high scale hectareage. Guatemala, a country with a strong commodity sector has seen a similar rise due to aggressive African Palm, Rubber and Sugar Cane projects. It is reasonable to assume therefore that, particularly for small and medium scale forest investors, will see a significant drop in scale, due to higher per hectare costs. One possible alternative is to revisit those cheaper lands.. Specifically, I’m referring to those lands that cost less due to soil and land conditions and will therefore be less appealing to industrial teak and agriculture investors. Naturally, you can conduct an independent analysis of what exactly might growth on these “poor” quality soils, but it is likely that you will end up with a list of native species, naturally adapted over millenia, to local conditions. Using hardwoods as an example, you can establish nitrogen-fixing species, to degraded areas and over time restore nutrient cycling and fertility self-reliance. Pioneer species can also play an important role in degraded lands (I’ll write more on the subject next week). The issue here is that there is a perception that plantation native species will garner less return within the 22 to 25 year rotation cycle expected of Teak. Now, while I refute this perception, let us assume it is true simply because that’s what you may encounter. The question is: do I ignore these cheaper lands, based on “teakability” or do I reanalyze how I might use, and likely improve, these lands? In other words will I achieve my goals (whether financial, social or environmental) by ignoring degraded or deforested lands? or do I plant something that I know will grow well and in all likelihood produce something valuable? Its the difference between doing nothing and making a sound investment. My advice in a nutshell: let your property decide what grows best!
For years people have asked me about Teak investment, not long ago considered the “golden ticket” of timber investment, today it is considered (a more-sober) reliable, long-term investment in a world looking for tangible assets. The current view, while undoubtedly possible is, well, complicated. Teak is a fast growing species, with a proven mid-term market (in India & China) and interesting upside, that much I can say with certainty. During the Teak craze (mid 90’s) we saw major plantations established, most notably in Costa Rica and Brazil, these were well-funded, well-intentioned projects. Years later, we would find that most of these plantations would under-perform both financially and biologically. You can hardly blame any one person, or any specific efforts, the science behind teak management was after all young, particularly in Latin America. Moreover value projections were based on natural forest stands in Indonesia and Burma, places where 100 year old trees could yield large dimension and of course beautiful lumber. Similarly growth projections were simply optimistic estimates. The truth is, Teak CAN be an excellent investment, but the idea that it can be grown anywhere, without specific silviculture is a fallacy. Teak with the right conditions will perform well in all aspects, meaning trees should be able to reach optimum volume and height in the predicted 22 to 25 years that full rotations are generally estimated. This of course will have a direct effect on the project’s financial performance. Investors need to understand the importance of time, weather, soil, topography and silviculture when choosing a timber investment. Do not assume timber managers are created equal, and do not assume teak is the best fit for your piece of land. In Panama, where I am now, we estimate 4% of the land adequate for Teak! That’s not very much! The other factor affecting viable “teakable” land is that in many cases you will be competing directly with the agro-industrial sector. Teak site condition requirements are similar to Sugar Cane, African Palm, Rubber and several fruit crops, meaning competition and thus land prices for these areas will undoubtedly continue to rise. Let’s face it, high-quality, arable land in a growing world, is only going to become more expensive. So just because you found or find cheap land that doesn’t mean Teak is the right choice for you. Choose wisely!
To be clear, Teak projects, when managed carefully can be reliable, lucrative and the tangible investment you are looking for. Just make sure you do your research.